Professional Documents
Culture Documents
= ` 9,36,250
Amount not yet due
` ` 16,800 1,800
1,051
12
= ` 13,13,750
Cash Down = ` 2,70,000
Total (` 16,800 150) = ` 25,20,000
Hire Vendor should recognise the amount of instalments collected and cash down value (i.e.
` 2,70,000 + ` 9,36,250) ` 12,06,250 as sale. Balance ` 13,13,750 is value of goods lying
with the customer at hire purchase price. Stock Reserve should be computed and deducted
from such amount to show the Hire Purchase Stock at cost.
Goods lying with Hire Purchaser at Hire Purchase Price
ice Pr urchase P Hire
Cost
Stock at cost =
`
`
`
14,000
13,13,750
16,800
= ` 10,94,792
Stock Reserve = (` 13,13,750 10,94,792) = ` 2,18,958
Journal Entries
` `
(1) For Cash down at the Cash/Bank A/c Dr. 2,70,000
time of hire transaction To Hire Purchase Sale A/c 2,70,000
(2) When instalments Instalment Due A/c Dr. 9,36,250
fall due To Hire Purchase Sales 9,36,250
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.32
(3) On collection of Cash/Bank A/c Dr. 9,36,250
instalments To Instalment Due A/c 9,36,250
(4) For instalment not Hire Purchase Stock A/c Dr. 13,13,750
due at the year To Trading A/c 13,13,750
(5) For Stock Reserve Stock Reserve A/c Dr. 2,18,958
To Hire Purchase Stock A/c 2,18,958
If some instalments become due but not collected at the year end, then they would appear in
the Balance Sheet as an asset just like Sundry Debtors.
9. Hire Purchase Transactions for Goods of Small Value
Till now we were dealing with the hire purchase transactions of significant sales value. Now,
let us discuss the hire purchase transactions between a retailer and the consumers.
Since in retail business, the volume of transactions is large and every day the retailer enters
into number of hire purchase contracts, therefore, accounting of such hire purchase
transactions of small values is important from the sellers view point and not the buyer.
Since large number of transactions take place it is neither feasable to maintain separate
account for each transaction nor the retailer is interested in knowing the profit in each hire
purchase transaction rather he is interested in knowing the overall profit or loss arising from
all the transactions in a particular accounitng period. The profit and hire purchase interest are
combined into one figure and it is apportioned over the hire purchase period.
10. Terms used in regard to Hire Purchase Sales of Small Items
(a) Cost price of goods sold on hire purchase: The hire vendor buys goods either from
the manufacturers directly or from the wholesalers. He sells them either against cash or under
the hire purchase system. When he sells goods against cash, he does so at a profit at a price
more than the cost price. But when he sells the goods under hire purchase, he sells them at a
price which is higher than the price of cash purchase. The extra charge is just to cover the
loss of interest on these transactions. However, the interest in these transactions is not
calculated separately, applying the concept of materiality. Profit, in this case, is calculated on
the basis of the difference between cost price and hire purchase price. This difference is
generally known II 'loading'. Loading can be expressed as a percentage of cost (known as
'mark-up') or as a percentage of sales value or hire purchase price (known as 'margin'). For
example, if the cost price of an item is ` 1,000 and to hire purchase price is ` 1,250, the profit
is ` 250. If the profit is expressed as a percentage of cost, mark up becomes 25%. Likewise, if
it is expressed as a percentage of the hire purchase price, the margin becomes 20%.
(b) Value of goods sold on hire purchase: It is the total of the hire purchase price of all
goods sold during the accounting period under the hire purchase system. Generally, the value
of goods sold on hire purchase given in the examination problem. If, however, it is not given, it
The Institute of Chartered Accountants of India
11.33 Accounting
can be worked out as follows:
(i) Applying loading rate to the cost of goods sold under hire purchase system.
(ii) [Down payment + (Number of installments X amount of each installment] x Number of
items sold.
(c) Cash received:It represents the total amount received during the accounting period in
respect to hire purchase sales. It includes down payment, installments received in respect to
previous year(s) as well as of the current year.
(d) Hire purchase debtors: Commonly, a debtor is a person to whom goods are sold on
credit. There some difference between an ordinary debtor and a hire purchase debtor. A hire
purchase customer is require to pay different installments on different due dates. In the case
of hire purchase debtors it is the total amount of such installments which have fallen due
during a particular accounting period but has not yet been paid to the hire purchase
customers. (see example of next item)
Hire purchase debtors is also known as (i) Installments due but not yet paid; or (ii)
Installment due, customer paying, etc.
(e) Hire purchase stock: It is also known as installments not yet due or goods with hire
purchase customers. Under a hire purchase agreement, some installments faIl due during the
current accounting period, while others faIl due on the subsequent accounting year(s). The
total amount of installments which have not yet become due during the current accounting
period is called stock on hire purchase. It should be not that it does not represent any physical
stock. For example, if the cash price of an item is ` 1,000 and the hire purchase price is
` 1,200. The payment is to be made in twenty four monthly equal installments, i.e., ` 50 p.m.
Out of 24 installments, 10 installments are due for payment during the current accounting
period 2011-12 and balance 14 installments are due for payment in the subsequent years. In
this case, the hire purchase stock will be ` 50 (24-10) = ` 700.
In this example, let us assume that out of the 10 instalments due during 2011-12, the hire
purchase custom paid only 6 installments during the year. Therefore, the hire purchase
debtors for 2011-12 will be ` 50 (10 - 6) = ` 200.
(f) Stock at shop: It is the physical stock of unsold goods lying in the godown of the
retailer. The cost of unsold stock in the shop has nothing to do with the ascertainment of profit
or loss arising out of the hire purchase transactions. However, this figure is relevant towards
the ascertainment of cost of goods sold on hire purchase which can be ascertained by
deducting the stock in the shop from the total purchases. When the cost of goods sold is
given, it becomes very simple to ascertain the value of goods sold on hire purchase by simply
add the percentage of mark-up.
The Institute of Chartered Accountants of India
11. Acco
Valu
There are tw
on hire purch
11.1 Debto
In this metho
Purchase Tr
separately.
(a) Debit th
(i) Op
pre
co
(ii) Op
fro
(iii) Va
(iv) Ex
(v) Lo
(b) Credit t
(i) Ca
inc
the
va
rec
Re
ab
tim
ounting of
e
wo common m
hase system.
ors Method
od the Hire Pu
rading Accou
he Hire Purch
pening balanc
evious year.
nvert that into
pening balanc
om the previou
alue of goods
xpenses incur
oss on reposs
the Hire Purc
ash received
cludes down p
e current yea
lue of HP ite
cognized in t
evenue Reco
ility to assess
me of sale. In
Debto
Hir
Tra
Hire
f Hire Pur
method for as
urchase Tradi
unt is to me
hase Trading
ce of H.P. St
Generally, it
o Hire Purcha
ce of H.P. De
us year.
s sold on Hire
rred during th
session of goo
chase Tradin
from hire p
payment, hire
ar collected d
m is not cred
he year of sa
ognition, also
s the ultimate
n case there i
Methods fo
ors Method
e Purchase
ading Account
e Purchase a
rchase Tr
certaining pro
ing account is
easure the p
g Account by
tock (Instalme
is shown at
ase price by a
ebtors (Instalm
Purchase du
he accounting
ods.
ng Account b
purchase cus
e purchase in
uring the acc
dited to HP T
ale as per the
the profit(rev
e collection wi
s uncertainty
or ascertaining
St
M
and Instalme
ransaction
ofit or loss on
s prepared. T
profitability of
y
ents not yet d
hire purchas
adding loadin
ment due but
uring the acco
g period.
by
stomers duri
stalments of
counting perio
Trading Accou
e matching c
venue) should
ith reasonable
y in ultimate c
g profit or loss
tock and Debto
ethod
1) Hire Purch
Stock Accoun
2) Hire Purch
Adjustment A
nt Sale Trans
ns for Goo
n sale of goo
The objective
f the Hire P
due) brought
se price. If it
g.
t not yet paid
ounting period
ng the acco
the previous
od. Since ful
unt, entire pro
concept. Furt
d be recogniz
e certainty is
collection of th
ors
ase
nt,
ase
Account
sactions 1
ods of Sm
ods of small v
of preparing
Purchase div
forward from
t is given at
d) brought forw
d.
ounting perio
year as well a
l amount of s
ofit on sale is
ther as per A
zed only when
not lacking a
he sales, reve
11.34
mall
value
Hire
vision
m the
cost,
ward
od. It
as of
sales
s not
AS 9,
n the
at the
enue
The Institute of Chartered Accountants of India
11.35 Accounting
recognition is postponed to the extent of uncertainty involved. In such cases, it may
be appropriate to recognise revenue only when it is reasonably certain that the
ultimate collection will be made. When recognition of revenue is postponed due to
the effect of uncertainties, it is considered as revenue of the period in which it is
properly recognised.
(ii) Instalments due but not paid on goods repossessed.
(iii) Closing balance of H.P. Stock (Instalment not yet due) at hire purchase price
carried forward to the next period. If it is not given in the problem, it can be
calculated by preparing Memorandum Goods with H.P. Customers Account.
(iv) The closing balance of H.P. Debtors (Instalments due but not yet paid) is carried
forward to next period. If the closing balance of H.P. Debtors is not given in the
problem, it can be calculated by preparing Memorandum H.P. Debtors Account.
Pass adjustment entries for the following:
(i) For loading on opening balance of Hire Purchase Stock
(Instalments not yet due/Goods with H.P. Customers)
Stock Reserve Account Dr.
To Hire Purchase Trading Account
(ii) For loading on goods sold on Hire Purchase during the year
Goods sold on Hire Purchase Account Dr.
To Hire Purchase Trading
(iii) For loading on closing balance of Hire Purchase Stock
(Instalments not yet due/Goods with H.P. Customers)
Hire Purchase Trading Account Dr.
To Stock Reserve Account
The proforma of a Hire Purchase Trading Account is given below:
Dr. Hire Purchase Trading Account Cr.
Date Particulars ` Date Particulars `
To Balance b/d: By Cash A/c
Hire Purchase Stock
(at H.P. price)
By Goods Repossessed
A/c (Instalments due
but not paid)
Hire Purchase
Debtors
By Stock Reserve A/c
To Goods Sold on H.P.
A/c (H.P. price)
(Loading on opening
H.P. stock)
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.36
To Loss on Goods
Repossessed A/c
By Goods sold on H.P.
A/c
To Expenses A/c (Loading on goods
sold)
To Stock Reserve A/c By Balance c/d:
(Loading on closing
H.P. stock)
H.P. Stock (at H.P.
price)
To Profit & Loss A/c H.P. Debtors
Let us see how to prepare Hire Purchase Trading Account.
(1) Credit all down payments and instalments falling due to hire purchase sales account.
Transfer balance in Hire Purchase Sales Account to Hire Purchase Trading Account.
(2) Transfer cost of all transactions to Hire Purchase Trading Account.
Hire Purchase Trading A/c Dr.
To Shop Stock A/c
(3) Charge any special expenses to Hire Purchase Trading Account.
(4) Treat instalments not yet due as stock lying with customers and transfer to Hire Purchase
Trading Account.
(5) Charge appropriate stock reserve.
Illustration 13
With the information given in Illustration 12, prepare Hire Purchase Trading A/c.
Solution
Hire Purchase Trading A/c
` `
To Shop Stock 21,00,000 By Hire Purchase
(14,000 150) Sales A/c 12,06,250
To Stock Reserve 2,18,958 By Stock (with
To Profittransferred customers)at hire
to P & L A/c 2,01,042 purchase price 13,13,750
25,20,000 25,20,000
Illustration 14
M/s Wye & Co. sell goods on hire purchase, adding 50% to cost. From the following figures
prepare the Hire Purchase Trading Account:
`
Goods with customers in Jan. 2012, instalments not yet due 5,400
Goods sold on hire purchase during 2012 25,500
The Institute of Chartered Accountants of India
11.37 Accounting
Cash received from customers during 2012 20,100
Instalments due but not yet received at the end of the year, customers paying 1,800
All figures are on the basis of hire purchase price.
Solution
Hire-purchase Trading Account for the year ending 31st Dec., 2012
Dr. Cr.
` `
To Stock with Customers on By Cash 20,100
1-1-2012 - hire purchase By Instalments due 1,800
price 5,400 By Goods sold on Hire
To Goods sold on Hire- Purchase A/c - loading 8,500
purchase A/c 25,500 By Stock Reserve (Opening) 1,800
To Stock Reserve required 3000 By Stock with customers 9,000*
To Profit & Loss A/c 7,300
41,200 41,200
*Stock with Customers on 31-12-2012 `
Instalment not due on 1-1-2012 5,400
Goods sold on H.P. 25,500
30,900
Less : Cash received 20,100
Instalments due 1,800 (21,900)
9,000
Illustration 15
Krishna Agencies started business on 1
st
April, 2012. During the year ended 31
st
March, 2013,
they sold under-mentioned durables under two schemes Cash Price Scheme (CPS) and
Hire-Purchase Scheme (HPS).
Under the CPS they priced the goods at cost plus 25% and collected it on delivery.
Under the HPS the buyers were required to sign a Hire-purchase Agreement undertaking to
pay for the value of the goods including finance charges in 30 instalments, the value being
calculated at Cash Price plus 50%.
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.38
The following are the details available at the end of 31
st
March, 2013 with regard to the
products :
Product
Nos.
purchased
Nos.
sold
under
CPS
Nos.
sold
under
HPS
Cost
per unit
`
No. of
instalments
due during the
year
No. of
instalments
received during
the year
TV sets 90 20 60 16,000 1,080 1,000
Washing
Machines
70 20 40 12,000 840 800
The following were the expenses during the year:
`
Rent 1,20,000
Salaries 1,44,000
Commission to Salesmen 12,000
Office Expenses 1,20,000
From the above information, you are required to prepare :
(a) Hire-purchase Trading Account, and
(b) Trading and Profit & Loss Account.
Solution
In the books of Krishna Agencies
Hire-Purchase Trading Account
for the year ended 31
st
March, 2013
` ` ` `
To Goods sold on H.P.
A/c:
TVs (60` 30,000)
18,00,000
By Bank A/c cash
received
TVs (1,000` 1,000)
10,00,000
Washing Machines
(40 ` 22,500)
9,00,000
27,00,000
Washing Machines
(800 ` 750)
6,00,000
16,00,000
To H.P. Stock Reserve
` 9,90,000
5 . 187
5 . 87
4,62,000
By Instalment Due A/c:
TVs
(80` 1,000)
80,000
To Profit & Loss A/c
(H.P.profit transferred)
7,98,000 Washing Machines
(40` 750)
30,000 1,10,000
By Goods sold on HP
A/c: (Cancellation of
loading)
` 27,00,000
5 . 187
5 . 87
By H.P. Stock (W.N 2)
12,60,000
9,90,000
39,60,000 39,60,000
The Institute of Chartered Accountants of India
11.39 Accounting
Trading and Profit & Loss Account
for the year ended 31
st
March, 2013
` ` ` `
To Purchases:
TVs (90` 16,000)
14,40,000
By Sales:
TVs (20` 20,000)
4,00,000
Washing Machines
(70 ` 12,000)
8,40,000
22,80,000
Washing Machines
(20 ` 15,000)
3,00,000
7,00,000
To Gross profit c/d 1,40,000 By Goods sold on H.P.
A/c
(27,00,000
12,60,000)
By Shop Stock (W. N 3)
14,40,000
2,80,000
24,20,000 24,20,000
To Salaries 1,44,000 By Gross profit b/d 1,40,000
To Rent
To Commission
1,20,000
12,000
By H.P. Trading A/c
(H.P. Profit)
7,98,000
To Office expenses 1,20,000
To Net Profit 5,42,000
9,38,000 9,38,000
Working Notes:
(1) Calculation of per unit cash price, H.P. price and Instalment Amount:
Product Cost
`
Cash Price
` (Cost 1.25)
H.P. price
` (Cash
Price1.50)
Instalment
Amount (` )
(H.P. price/No.
of instalments)
TV sets 16,000 20,000 30,000 1,000
Washing Machines 12,000 15,000 22,500 750
(2) Calculation of H.P. Stock as on 31
st
March, 2013:
Product Total No. of
Instalments
(Nos.)
Instalments
Due in 2012-
2013
(Nos.)
Instalments
not due in 2012-
2013
(Nos.)
Amount
`
TV sets 1800 1080 720 7,20,000
Washing Machines 1,200 840 360 2,70,000
9,90,000
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.40
(3) Calculation of Shop Stock as on 31
st
March, 2013:
Product Purchased(Nos.) Sold (Nos.) Balance (Nos.) Amount `
TV sets 90 80 10 1,60,000
Washing Machines 70 60 10 1,20,000
2,80,000
Illustration 16
From the following information extracted from the books of Mohan Pvt. Ltd. prepare Hire
Purchase Trading account for the year ended 31.3.2012, showing the profit in respect of the
hire-purchase business of the company:
(i) Instalments due but not received on 1.4.2011 ` 30,000.
(ii) Instalments due but not received on 31.3.2012 ` 50,000.
(iii) Cash received during the year ended 31
st
March 2012 by way of a hire-purchase
instalments - ` 40,00,000.
(iv) Value of Stock out on hire-purchase as at 1.4.2011 at hire-purchase price (loading 20%
above cost) - ` 1,20,000.
(v) Cost price of truck out in hire-purchase as on 31.3.2012, amounted ` 20,00,000, in
respect of which instalments receivable were ` 24,00,000 and instalments received and
due up to 31.3.2012 amounted ` 18,00,000 in total.
(vi) Purchase of trucks during the financial year 2011-12 - ` 40,00,000.
(vii) Sale of trucks, otherwise than on H.P. (at a profit of 6.25% of cost thereof) -
` 4,25,000.
(viii) Body building charges in respect of truck, sold on H.P. - ` 2,00,000.
(ix) Interest paid was ` 40,000 and unsold trucks on 31.3.2012 at cost price were
` 80,000 (Hire-purchase price ` 96,000).
Solution:
In the books of Mohan Pvt. Ltd.
Hire Purchase Trading Account
Dr. Cr.
` `
To Opening Balance: By Bank 40,00,000
H.P. Stock 1,20,000 By Stock reserve 20,000
To
H.P. Debtors
Trucks sent on H.P.
30,000 1,50,000 By Trucks sent on H.P. 7,04,000
Purchased during the By Closing balance
year 40,00,000 H.P. Stock 6,00,000
Less: Other sales 4,00,000 H.P. Debtors 50,000
36,00,000
The Institute of Chartered Accountants of India
11.41 Accounting
Less: Closing Stock 80,000
35,20,000
Add: Loading 7,04,000 42,24,000
To Body Building Charges 2,00,000
To Bank (Interest paid) 40,000
To Stock reserve (20%on cost) 1,00,000
To Profit and Loss A/c 6,60,000
53,74,000 53,74,000
Working Notes:
Value of closing H.P. Stock:
(1) Cost of trucks in respect of Hire Purchase agreement subsisting as on
31.3.2012
20,00,000
(2) H.P. price in respect thereof 24,00,000
(3) Instalments not due (24 lakhs less 18 lakhs) 6,00,000
11.2 Stock and Debtors Method
In this method, Hire Purchase Stock Account, Hire Purchase Adjustment Account is
maintained. Following are the entries to be made.
(i) When goods are sold on hire purchase
Hire purchase stock A/c Dr. Full H.P. Price
To Stock A/c Actual cost price
To Hire Purchase Adjustment A/c Difference between
cost and H.P. price
(ii) When instalments become due for payment
Hire purchase Debtors A/c Dr.
To Hire purchase Stock A/c
(iii) When cash is received
Cash A/c Dr.
To Hire Purchase Debtors A/c
(iv) Stock Reserve on opening Stock
Stock Reserve A/c Dr.
To Hire Purchase Adjustment A/c
(v) Stock Reserve on closing Stock
Hire Purchase Adjustment A/c Dr.
To Stock Reserve A/c
Hire purchase Debtors Account will consist of opening balance instalment due on goods sold
on hire purchase on the debit side while cash received and closing balance on the credit side.
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.42
Hire purchase stock account will consist of opening balance and goods sold on hire purchase
during the year in the debit side, while instalments due from debtors and closing balance on
the credit side. The stock values are recorded at hire purchase price (i.e. cost + profit on H.P.
Sales).
Hire purchase adjustment account will consist of stock reserve on opening stock and closing
stock in the credit side and debit side respectively. Further the loading element in goods sold
on hire purchase (profit) will be credited in this account. This account shows the actual profit
earned by means of hire purchase system.
Illustration 17
Y M/s sells products on hire purchase terms, the price being cost plus 33-1/3%. From the
following particulars for 2012, prepare Hire Purchase Stock Account, Shop Stock Account,
Hire Purchase Debtors Account, Stock Reserve Account and Hire Purchase Adjustment
Account (for profit) :
2012 `
Jan. 1 Stock out on hire at Hire Purchase Price 1,20,000
Stock in hand, at Shop 15,000
Instalment due (Customers still paying) 9,000
Dec. 31 Stock out on hire at Hire Purchase Price 1,38,000
Stock in hand, at Shop 21,000
Instalments due (Customers still paying) 15,000
Cash received during the year 2,40,000
Solution
Hire Purchase Debtor Account
2012 ` 2012 `
Jan. 1 To Balance b/d 9,000 Jan. 1 By Bank A/c 2,40,000
To Hire Purchase Stock A/c By Balance c/d 15,000
(instalments due during
the year) (Balancing fig.) 2,46,000
2,55,000 2,55,000
Hire Purchase Stock Account
2012 ` 2012 `
Jan. 1 To Balance b/d 1,20,000 Jan. -
To Goods sold on Hire Dec. By H.P. Debtors A/c 2,46,000
Purchase (75%) 1,98,000 Dec. 31 By Balance c/d 1,38,000
To H.P., Adj. A/c (25%) 66,000
3,84,000 3,84,000
The Institute of Chartered Accountants of India
11.43 Accounting
Shop Stock Account
2012 ` 2012 `
Jan. 1 To Balance b/d 15,000 By H.P. Stock A/c
To Purchases A/c (Cost of Goods sold) 1,98,000
(Balancing fig.) 2,04,000 By Balance c/d 21,000
2,19,000 2,19,000
Stock Reserve Account
2012 ` 2012 `
To Hire Purchase Adjustment By Balance b/d
(transfer) 30,000 (25% on 1,20,000) 30,000
To Balance c/d 34,500 By Hire Purchase
Adjustment A/c 34,500
64,500 64,500
Hire Purchase Adjustment Account
2012 ` 2012 `
To Stock Reserve-Closing 34,500 By Stock Reserve-Opening 30,000
To Profit & Loss Account 61,500 By H.P. Stock 66,000
96,000 96,000
12. Calculation of Missing Figures
Sometimes in the examination, some figures required to calculate profit/loss are not given.
These may be: (i) Hire Purchase Stock; (ii) Hire Purchase Debtors; (iii) Purchases; or (iv)
Cash received, etc., Before preparing the Hire Purchase Trading Account, the missing item(s)
should be calculated first. The following steps are followed:
Step 1: Draw up the following Memorandum Accounts.
(a) Memorandum Stock at Shop Account.
(b) Memorandum H.P. Stock Account/Stock with H.P. Customers Account.
(c) Memorandum H.P. Debtors Account/Instalments Due Account
Step 2: Place the available figures in the respective accounts.
Step 3: Balance the account having maximum figures available. It will be helpful in finding
out the missing figure of that account.
Step 4: Place the figures so calculated in Step 3 to the relevant account.
Step 5: Continue the process of transfer until all the figures are available.
The proforma of these accounts are given below:
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.44
Dr. Memorandum Stock at Shop Account Cr.
Particulars ` Particulars `
To Balance b/d (at cost) By Goods sold on Hire
Purchase A/c (at cost)
To Purchases By Balance c/d
Dr. Memorandum Hire Purchase Stock Cr.
Particulars ` Particulars `
To Balance b/d (at H.P. Price) By Cash A/c
To H.P. Stock A/c (total
instalments due)
By Goods Repossessed A/c
(instalments not yet due)
By Balance c/d
Dr. Memorandum Hire Purchases Debtors Account Cr.
Particulars ` Particulars `
To Balance b/d (at H.P. price) By Cash A/c
To H.P. Stock A/c (total
instalments due)
By Goods Repossessed A/c
(install, due but not yet
recd.)
By Balance c/d
13. Repossession
In a hire purchase agreement the hire purchaser has to pay up to the last instalment to obtain
the ownership of goods. If the hire purchaser fails to pay any of the instalments, the hire
vendor takes the asset back in its actual form without any refund of the earlier payments to the
hire purchaser. The amounts received from the hire purchaser through down payment and
instalments are treated as the hire charges by the hire vendor. This act of recovery of
possession of the asset is termed as repossession.
Repossessed assets are resold to any other customer after repairing or reconditioning (if necessary).
Accounting figures relating to repossessed assets are segregated from the normal hire purchase
entries. Repossessions are then accounted for in a separate Goods Repossessed Account.
The following are the Journal Entries for repossession
(1) When the goods are repossessed
Goods Repossessed Account Dr. [Instalments due but not yet paid]
To Hire Purchase Trading Account
(2) When there is a loss on repossession
[Selling price/market price is less than
Instalments due but not yet paid]
The Institute of Chartered Accountants of India
11.45 Acc
Hire Pu
To L
(3) When t
[Selling
Instalm
Profit o
To H
So far as the
of the asset
called Comp
13.1 Comp
The hire ven
Account to G
The hire pur
Vendor Acco
on repossess
Particular
Purchase/Sa
Installment
Interest
Repossessio
ounting
urchase Tradi
Loss on Repo
there is a pro
g price/market
ments due but
n Repossess
Hire Purchase
e repossessio
or a part ther
plete Reposse
plete Repos
ndor closes H
Goods Reposs
rchaser close
ount to Hire P
sion in Asset
rs
ales Asset
To
Hire V
To
Intere
To
on Hire V
T
Complete R
ng Account
ossession Acc
ofit on repos
t price is grea
t not yet paid]
sion Account
e Trading Acc
on of assets a
reof dependin
ession and th
session
Hire Purchase
sessed Accou
es the Hire
Purchase Ass
Account.
Books of hire
t A/c
o Hire Vendor
Vendor A/c
o Cash A/c
est A/c
o Hire Vendor
Vendor A/c
o Asset A/c
Repossession
count
ssession
ater than
]
count
are concerned
ng on the agr
he latter Par
ers Account
unt.
Vendors Acc
set/Trading A
e purchaser
Dr.
r A/c
Dr.
Dr.
r
Dr.
Repossessio
P
Dr.
Dr.
d, the hire ve
reement betw
tial Reposses
by transferri
count by tra
ccount and t
Hire Pu
To S
Cash A
To
Hire Pu
To
Goods
To
on
Partial Reposse
endor can tak
ween the parti
ssion.
ng balance o
nsferring the
hen finding th
Books of hir
urchaser A/c
Sales A/c
A/c
Hire Purchas
urchaser A/c
Interest A/c
s Repossesse
Hire Purchas
ession
ke back the w
ies. The form
of Hire Purch
e balance of
he profit and
re vendor
Dr.
Dr.
ser A/c
Dr.
ed A/c Dr.
ser
whole
mer is
haser
Hire
loss
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.46
13.2 Partial Repossession
In case of a partial repossession, only a part of the asset is taken back by the hire vendor and
other part is left with the hire purchaser. The Journal Entries are as usual up to the date of default
(excepting entry for payment) in the books of both the parties. As a portion of the asset is still left
with the hire purchaser, neither party closes the account of the other in their respective books.
Assets are repossessed at a mutually agreed value (based on agreed rate of depreciation which is
an enhanced rate). The hire vendor debits the Goods Repossessed Account and credit the Hire
Purchaser Account with the value as agreed upon on the repossession. Similarly, the hire
purchaser debits the Hire Vendor Account and credits the Assets Account with the same amount. If
the repossessed value is less than the book value of the asset, the difference is charged to the
Profit and Loss Account of the hire purchaser as loss on surrender.
For the remaining portion of the asset lying with the hire purchaser, the (Hire Purchaser) applies
the usual rate of depreciation and shows the Asset Account at its usual written-down value.
Illustration 18
From the following prepare Hire Purchase Trading Account of M/s Kolkata Traders who sells
goods on hire purchase basis at cost plus 25%.
`
Instalments not due on 31-12-2011 3,00,000
Instalments due and collected during 2012 8,00,000
Instalments due but not collected during 2012
including ` 10,000 for which goods were
repossessed 50,000
Instalments not due on 31-12-2012 including
` 20,000 for which goods were repossessed 3,70,000
Instalments collected on repossessed stock 15,000
M/s Kolkata Traders valued repossessed stock at 60% of original cost.
Solution
Hire Purchase Trading A/c
` `
To Goods with customers at By Hire Purchase Sale 8,50,000
cost (31-12-2011) 2,40,000 Goods with customers at
Shop Stock 7,20,000 cost (31-12-2012) 2,80,000
Bad Debt 2,000
Loss on Repossession 2,400
Profit & Loss A/c
Transfer of H.P. Profit 1,65,600
11,30,000 11,30,000
The Institute of Chartered Accountants of India
11.47 Accounting
Working Notes:
(1) Hire Purchase Sales: `
Instalments due and collected 8,00,000
Add: Instalments due but not collected 50,000
8,50,000
(2) Loss on Repossessed stock:
Hire Purchase Price of Repossessed Stock
Instalments Collected 15,000
Instalments Due 10,000
Instalments Not Due 20,000
45,000
Cost `
100
45,000
125
36,000
Valuation on repossession`
60
36,000
100
21,600
Cost of instalments due + Instalments not yet due
`
100
( 10,000 20,000)
125
+ 24,000
Loss (` 24,000 ` 21,600) 2,400
(3) Goods taken from shop stock at cost:
H.P. Sales at cost
100
8,50,000
125
6,80,000
Stock with customers 31-12-2012 at cost
`
100
3,50,000
125
2,80,000
9,60,000
Less : Stock with customers 31-12-2011 at Cost 2,40,000
`
100
3,00,000
125
7,20,000
(4) Bad Debt :
Instalment due but not collected 10,000
Instalment not yet due at cost
`
100
20,000
125
16,000
26,000
Less: Cost of instalments due and instalments not yet due 24,000
2,000
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.48
Illustration 19
The hire purchase department of B.G. M/s sells television sets and room coolers. This
department was newly started in 2012. The relevant information is as follows:
Television set Room coolers
` `
Cost 5,400 2,000
Cash Price 6,300 2,400
Cash down payment 900 400
Monthly instalment 600 200
Number of instalments 10 12
During the year, 100 television sets and 120 room coolers were sold on hire purchase basis.
Two television sets on which 3 instalments only could be collected and 4 room coolers on
which 5 instalments had been collected were repossessed. These were valued at ` 10,000
and after reconditioning at a cost of ` 1,000 were sold outright for ` 14,000. Other instalments
collected and those due (customer still paying) were respectively as follows :
Television sets 270 and 20
Room coolers 400 and 30
Prepare Accounts on stocks and debtors system to reveal the profit of the Department.
Solution
B.G. Limited
Hire Purchase Stock Account
` `
To Goods sold on H.P. 10,26,000 By H.P. Debtors A/c 4,05,600
By Goods Repossessed A/c
(Instalments not due on
repossessed goods) 14,000
By Balance c/d
(Instalment not yet due) 6,06,400
10,26,000 10,26,000
Hire Purchase Debtors Account
` `
To Hire Purchase Stock A/c 4,05,600 By Bank A/c 3,87,600
By Balance c/d 18,000
4,05,600 4,05,600
The Institute of Chartered Accountants of India
11.49 Accounting
Goods Repossessed Account
` `
To Hire Purchase Stock A/c 14,000 By Hire Purchase Adjustment A/c
(Balancing Figure) 4,000
By Balance c/d 10,000
14,000 14,000
To Balance b/d 10,000 By Bank (Sales) 14,000
To Bank (Exp.) 1,000
To Hire Purchase Adjustment A/c
(Profit) 3,000
14,000 14,000
Goods sold on Hire Purchase Account
` `
To Hire Purhcase By Hire Purchase Stock A/c 10,26,000
To Adjustment A/c (loading) 2,46,000
To Profit 7,80,000
10,26,000 10,26,000
Hire Purchase Adjustment Account
` `
To Goods repossessed A/c (Loss) 4,000 By Goods sold on Hire
To Stock Reserve 1,44,971 Purchase (Loading) 2,46,000
To Profit 1,00,029 By Goods Repossessed
(Profit on sale) 3,000
2,49,000 2,49,000
Working Notes :
(i) Hire Purchase Price is ` 6,900 for each television set and ` 2,800 for each room cooler.
Total cost and sales on this basis are as follows:
H.P. Price Cost
` `
Television sets (100) 6,90,000 5,40,000
Room Coolers (120) 3,36,000 2,40,000
10,26,000 7,80,000
Television sets Room Coolers
` `
(ii) Cash collected
Down payment
(900 100) 90,000 (400 120) 48,000
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.50
Instalments collected
(600 270) 1,62,000 (400 200) 80,000
Amount collected on Repossessed goods
(3 2 600) 3,600 (5 4 200) 4,000
2,55,600 1,32,000
(iii) Instalment not yet due: `
Television: Total instalments on 98 sets 980
Instalments collected & due 290
690
Amount of 690 instalments @ ` 600 each 4,14,000
Room Coolers:
Total instalment on 116 Room Coolers 1,392
Less : Instalments collected & due 430
962
Amount of 962 instalments @ ` 200 each = ` 1,92,400
Total amount (4,14,000 + 1,92,400) = ` 6,06,400
(iv) Stock Reserve:
Television sets
1,500
4,14,000
6,900
90,000
Room Coolers
800
1,92,400
2,800
54,971
1,44,971
(v) Instalment not due on repossessed goods: `
2 Television sets 7 instalments on each @ ` 600 8,400
4 Room Coolers 7 instalments on each @ ` 200 5,600
14,000
(vi) Instalment due but not collected : `
Television sets (20 ` 600) 12,000
Room Cooler (30 ` 200) 6,000
18,000
14. Instalment Payment System
In instalment payment system the ownership of the goods is passed immediately to the buyer
on the signing the agreement. Because of this basic difference the accounting entries under
instalment payment system are slightly different from those passed under the hire-purchase
system. The scheme of entries is as under:
Books of buyer: Buyer debits asset account with full cash price, credits vendors account with full
instalment price and debits interest suspense account with the difference between full cash price
and full instalment price. Interest is debited to interest suspense account (not interest account)
because it includes interest in respect of a number of years. Every year interest account is debited
The Institute of Chartered Accountants of India
11.51 Accounting
and interest suspense account is credited with the interest of current year. Interest account, at the
end of the year, is closed by transferring to profit and loss account. The balance of interest
suspense account (this is a debit balance) is shown in the balance sheet on the asset side. Vendor
is paid the instalment due to him and entry for the depreciation is passed in the usual way.
Books of Seller: The seller debits the purchaser with the full amount (instalment price) payable by
him and credits sales account by the full cash price and credits interest suspense account by the
difference between the total instalment price and total cash price. Seller, like the buyer, also
transfers the amount of interest due from the interest suspense account interest account every
year. Interest account is closed by transferring to profit and loss account and the balance of
interest suspense account is shown in the balance sheet on the liability side. On receiving the
instalment the vendor debits cash/bank account and credits purchasers account.
15. Difference of Hire Purchase Agreement and Instalment Payment
Agreement
A hire purchase agreement is a contract of bailment coupled with an option to the hire
purchaser to acquire the goods delivered to him under such an agreement. By the delivery of
goods to the hire purchaser, the hire vendor merely pass with their possession, but not the
ownership. The property or title to the goods is transferred to the hire-purchaser, on his paying
the last instalment of the hire price or complying with some other conditions stipulated in the
contract. At any time before that the hire-purchaser has the option to return the goods and, if
he does so, he has only to pay the instalments of price that by then have fallen due. The right
or option to purchase is the essence of hire-purchase agreement. In the event of a default by
the buyer (hire purchaser) in the payment of any of the instalments of hire price, the vendor
can take back the goods into his possession. This is legally permissible since the property in
the goods is still with the vendor.
On the other hand, it may have been agreed between the buyer and the seller that the price of
the goods would be payable by instalments and the property would immediately pass to the
buyer; in the event of a default of instalments, it would not be possible for the vendor to
recover back the goods. He, however, would have the right to bring an action against the
purchaser for the recovery of the part of the price that has not been paid to him.
Analysis of the hire purchase price : The hire purchase price is always greater than the cash
price, since it includes interest payable over and above the price of the goods to compensate
the seller for the sacrifice he has made by agreeing to receive the price by instalments and the
risk that he thereby undertakes. It is thus made up of following elements:
(a) cash price;
(b) interest on unpaid instalments; and
(c) a charge to cover the risk involved in the buyer defaulting to pay one or more of
instalments of price or that of his returning the goods in a damaged condition.
The Institute of Chartered Accountants of India
Hire Purchase and Instalment Sale Transactions 11.52
Interest is the charge for the facility to pay the price for the goods by instalments after they have
been delivered. The rate of interest is generally higher than that payable in respect of an advance
or a loan since it also includes a charge to cover the risk that the hirer may fail to pay any of the
instalments and, in such an event, the goods may have to be taken back into possession in
whatever condition they are at the time. A separate charge on this account is not made as that
would not be in keeping with the fundamental character of the hire-purchase sale.
Summary
Under Hire Purchase System, hire purchaser will pay cost of purchased asset in
installments. The ownership of the goods will be transferred by the Hire Vendor only after
payment of outstanding balance.
Under installment system, ownership of the goods is transferred by owner on the date of
delivery of goods.
Accounting Method when goods have substantial sales under Hire Purchase
System
Cash price Method
Interest suspense method
Accounting Method when goods have small sales under Hire Purchase System
Debtor method
Stock & Debtor Method
Repossession
Complete Repossession
Partial Repossession
The Institute of Chartered Accountants of India